Sunday, 31 January 2010

Dealers say one of the biggest casualties of the margin calls is Resorts World at Sentosa operator Genting Singapore PLC.

Mid-Week Comment Jan 27: Margin calls, S-chip woes drag down STI

Tags: China Milk Products Group | China Printg & Dyeing Hldg | Delong Holdings | Ferrochina | Genting Singapore Plc | Ks Energy Services | New Lakeside Holdings | Sunshine Holdings
Written by Goola Warden
Thursday, 28 January 2010 09:16

ON WEDNESDAY, ‘forced selling’ by local traders on margin calls hit the market and drove the benchmark Straits Times Index down a further 34 points to close at 2,706.26. In all, the STI has fallen 187 points since last Wednesday, and 227 points from its Jan 11 high of 2,933.

Dealers say one of the biggest casualties of the margin calls is Resorts World at Sentosa operator Genting Singapore PLC. Its share price is down almost 20% since the start of the year. According to a report by DBS Group Research, there could be a potential share overhang from the “mandatory conversion of remaining $321 million Convertible Bonds 2 at 95 cents (338 million shares) on Feb 9”.

Separately, KS Energy Services, the offshore oil & gas and marine services and support company run by Indonesian millionaire Kris Wiluan, announced it plans to issue $50 million in principal amount of 3% convertible bonds due 2015 at an issue price of 89.34% of the principal. The $44.67 million raised will be used to refinance existing debts. The initial conversion price is $1.60 per share, representing a 30% premium to its last traded price of $1.23. KS Energy may also undertake a further issue of convertible bonds worth up to $57 million if required.

According to OCBC Investment Research, the funds are likely to be used because bondholders of the previous tranche of convertible bonds issued in 2007 might opt for early redemption. The bonds issued to Stark funds were at a conversion price of $4.05. “Early redemption would require a yield to maturity of 5.5% for Stark, and we therefore estimate KS Energy would need about $113 million ready,” OCBC says. The report believes that KS Energy could come to the market with new shares “at any time, given the capital-intensive nature of its business” and has a “hold” recommendation.

Convertible bonds have been a poisoned chalice of sorts for some stocks, particularly S-chips. On Monday, the South China Morning Post said six of 11 S-chips which sold convertible bonds between 2005 and 2008 have insufficient funds to repay their convertible bondholders. The S-chips named were China Milk Products Group, steel coil maker Delong Holdings, property developer Sunshine Holdings, China Printing & Dyeing Holding, waste treatment services provider Sino-Environment Technology Group and steel group FerroChina.

Meanwhile, a local broker report says S-chip New Lakeside Holdings, the producer of apple concentrate, could be insolvent, following the company’s decision to make an RMB22.75 million ($4.7 million) provision for its liability to Bank of China. This may also force the other two principal bankers China Construction Bank and ICBC to demand immediate repayment of RMB14.5 million and RMB10 million. As a result of these claims, the company’s liabilities will exceed its assets.

To be sure, Singapore stocks weren’t the only ones being sold down. Markets everywhere in Asia reeled, largely because of China’s credit-tightening measures. According to a Citigroup Research report dated Jan 25, Asian fund inflows were down 94% week-on-week to US$29 million ($40.7 million) last week. Month-to-date, net inflows to Asian funds barely rose above US$670 million, the report says. This is much smaller than average inflows of US$2.1 billion in the month of January between 2004 and 2007. Asian fund inflows were dampened by China tightening and the strong dollar, the report says.

The market is becoming increasingly “oversold” based on short-term oscillators. For the STI, the 21-day RSI is at 34% and the 14-day RSI at 24%. These are at their lowest levels since March last year. Support appears in the 2,700 area which was tested several times before the index eventually broke out. On the flip side, the STI is below its still rising 100-day moving average now at 2,748 and the 200-day moving average at 2,539. With support appearing soon, and indicators — including the five-day stochastics — at extreme lows, the market should attempt a rebound at resistance level to 2,748. A stronger upmove would only develop after a series of positive divergences, which would take four to five weeks to develop.

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